With love in the air on Valentine’s day, endless amounts of consumers will pile into stores, buying up cards, chocolates, or mega-sized teddy bears to share with the ones they love. In fact, on average Valentine’s Day participants will spend $196.31 according to a recent report. With that decent dent coming in each February, Valentine’s Day can help us softly return our eyes to a very important and relevant topic: Budgeting.
I know, that dreaded B-word, and on the most lovey-dovey day of the year! While it may bring a more serious and somber mood associated with the connotations of it, budgeting can and should be viewed in a much lighter and friendly way! Using modern-day technological and analytical methods, we can more easily wrap our arms around what can seem to be an extremely tedious and cumbersome process.
As with so many an established method, modern analysis has found unique and interesting ways to innovate classic solutions. One great example of such innovation is a theory coined as “zero-base budgeting”. In essence, this idea conjectures that all expenses in a set period should be categorized in advance such that each dollar earned should go towards a specific category. For example. If you made $4,000 per month, in a zero-based budget you’d allocate $2,000 for mortgage payments, $500 for food, and let’s say $500 for savings (wouldn’t it be nice if all budgets were this simple?). Now we have each expense labeled out and our income allocated towards them. But wait! We still have $1,000 left unallocated! Instead of leaving this piece out, we need to find a home for this cash to get back to our zero-based goal. So why not allocate this extra funding we found towards a great goal of paying down debt, or if we don’t have any debt, let’s shoot for an emergency fund or perhaps some extra cash for a romantic weekend getaway! Or, let’s say we don’t end up spending all $500 for food at the end of the month. We could roll this forward, or…go out for a nice date night! Using this technique, you’ll have a purpose for each and every dollar, which ensures you put your money to work for you and weeds out those unnecessary expenses that rears its head along the way!
An even simpler and more general rule to work with that incorporates the same principle is the 50/30/20 rule. Essentially, it’s a zero-based budget with your categories capped to three distinct classes: fixed expenses, discretionary spending, and savings/debt payments. Knowing this, our aim with this method is to re-organize and cut down expenses such that each month, your after-tax income is split between the three with the following, intuitive guidelines: 50% of your income goes towards fixed expenses (think insurance or mortgage payments), 30% goes towards discretionary spending (think entertainment or gifting), and 20% is used to pay down debt or build up savings. This last 20% category may be the most important factor to future financial success. By "paying yourself" i.e. saving on a regular basis, you start in motion the power of compounding. Once again, following these guidelines will also give your earnings a direct usage, which builds a baseline for proactive monitoring, instead of looking back and seeing where you overspent or having a non-distinct spending goal. Now you can move through the month and monitor where you are for each category using each method, and be able to adjust your spending accordingly!
Now, I know what you’re thinking: “This is great in theory, but I still have to come home from a long day and tally up all my various receipts, statements, etc. to create this budget, let alone monitor it constantly”! Well, fear not, as this is where the technological advancement pieces become so handy, and make budgeting a breeze! Nowadays, there’s an app for everything, and budgeting is certainly no exception! For example, a small indie firm called Intuit (yeah the same people who make that obscure tax software, what was it called again? NitrousTax?) has a free app for your phone that can help you tackle this project quite a bit. With Intuit Mint, you can create a link to any number of checking or savings accounts, debit or credit cards, or even straight to billing sites! Once all these accounts are linked, transaction data from each will start pouring in, and are automatically categorized for you into several different arenas which fit nicely with the zero-based budgeting plan we discussed! Within the app, you can also set goals for each of these categories and reallocate existing transactions that might have been mislabeled. Now each month, you’ll get a summary of how much you spent in each division, and Mint can also send you a notification when you’re close to exceeding your goal, to keep you right on track. (Additionally this app has some other cool features like credit score sampling and bill pay reminders, all for free!)
Some other apps that work in a similar capacity include EveryDollar, created by the zero-based budget guru Dave Ramsey, which has a free version that performs the same function with a slightly more intuitive user interface, but will require you to manually enter your transactions each month. There are also several others out there on the app market including Monthly Budget Planner & Daily Expense Tracker, BudgetBakers’ Wallet, Spendee, and many others. Each of these have their own unique setup and categorization but accomplish the task of simplifying your budgeting process!
All in all, budgeting is one of the biggest pieces of one’s financial puzzle. Most of the time, our income levels, investment performance, social security or any number of other inputs are not 100% in our control. But one important area, in which we do have total control is our spending, which makes monitoring this area a key to long-term financial success. By using analytical ideologies like zero-based budgeting or software aimed at making the whole process easier to follow-along with, we can take out the stress and time that used to be associated with budgeting, and instead create our own steps to reaching our financial goals whether those are getting out of debt, building long-term wealth, or just buying that rose bouquet for our significant other.
For further advice on budgeting and its ties to our financial planning process, please reach out to us! Happy Valentine’s Day!